UNIT

1 Macroeconomics

LESSON 4

Equilibrium Price and Quantity Introduction and Description

Time Required

In this lesson we bring the two sides of the market — demand and supply — together to determine the equilibrium price and quantity. The students should understand that unless there are forces operating to change supply or demand, the price and quantity will remain at the equilibrium.

One class period or 45 minutes

Activity 7 brings the supply and demand sides of the market together and helps the students understand equilibrium price and quantity. The factors that shift supply and demand are also used to emphasize the impact of supply or demand on the equilibrium price and quantity. The second part of Activity 7 has the students work through changes in supply and demand and the effects in related markets.

Objectives 1. Define equilibrium price and equilibrium quantity. 2. Determine the equilibrium price and quantity when given the demand for and supply of a good or commodity. 3. Explain why, at prices above or below the equilibrium price, market forces operate to move the price back toward equilibrium price. 4. Predict the equilibrium price and quantity if there are changes in demand or supply. 5. Given a change in supply or demand, explain which curve shifted and why. 6. Explain how markets act as rationing devices.

Materials 1. Activity 7 2. Visual 1.9

Procedure 1. Begin with a discussion of equilibrium. Review the importance of the market as a price determination mechanism. 2. Use Visual 1.9 to explain market equilibrium. (A) What happens if the price is $10? The quantity supplied is 100, and the quantity demanded is 60. Therefore, there is excess supply. (B) What happens if the price is $6? The quantity demanded is 100, and the quantity supplied is 60. Therefore, there is excess demand. (C) What happens if the price is $8? The quantity that producers want to sell is exactly equal to the quantity that buyers want to buy. The market is in equilibrium. 3. Have the students start Activity 7 in class and complete it for homework. 4. Review with the students the answers to Activity 7.

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.

357

UNIT

1 Macroeconomics

LESSON 4 ■ ACTIVITY 7

Answer Key

Equilibrium Price and Equilibrium Quantity Part A Figure 7.1 below shows the demand for Greebes and the supply of Greebes. Plot these data on the axes in Figure 7.2. Label the demand curve D and label the supply curve S. Then answer the questions that follow. Fill in the answer blanks, or underline the correct answers in parentheses.

Figure 7.1

Demand for and Supply of Greebes Price ($ per Greebe) $.15 .20 .25 .30 .35

Quantity Demanded (millions of Greebes) 300 250 200 150 100

Quantity Supplied (millions of Greebes) 100 150 200 250 300

Figure 7.2

PRICE PER GREEBE

Demand for and Supply of Greebes .55 .50 .45 .40 .35 .30 .25 .20 .15 .10 .05 0

S1 E1

S

E

E2 D1

50

D

100 150 200 250 300 350 QUANTITY (millions of Greebes)

400

1. Under these conditions, competitive market forces would tend to establish an equilibrium price of per Greebe and an equilibrium quantity of 200 million Greebes. $ 0.25 2. If the price currently prevailing in the market is $0.30 per Greebe, buyers would want to buy 150 million Greebes and sellers would want to sell 250 million Greebes. Under these conditions, there would be a (shortage / surplus) of 100 million Greebes. Competitive market forces would tend to cause the price to (increase / decrease) to a price of $0.25 per Greebe. At this new price, buyers would now want to buy 200 million Greebes, and sellers now want million Greebes. Because of this change in (price / underlying conditions), to sell 200 358

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.

UNIT

1 Macroeconomics the (demand / quantity demanded) changed by 50 (supply / quantity supplied) changed by

LESSON 4 ■ ACTIVITY 7

Answer Key

50 million Greebes, and the million Greebes.

3. If the price currently prevailing in the market is $0.20 per Greebe, buyers would want to buy 250 million Greebes, and sellers would want to sell 150 million Greebes. Under these conditions, there would be a (shortage / surplus) of 100 million Greebes. Competitive market forces would tend to cause the price to (increase / decrease) to a price of $0.25 per Greebe. At this new price, buyers would now want to buy 200 million Greebes, and sellers now want to sell 200 million Greebes. Because of this change in (price / underlying conditions), the (demand / quantity demanded) changed by 50 million Greebes, and the 50 million Greebes. (supply / quantity supplied) changed by 4. Now, suppose a mysterious blight causes the supply schedule for Greebes to change to the following:

Figure 7.3

New Supply of Greebes Price ($ per Greebe) $.20 .25 .30 .35

Quantity Supplied (millions of Greebes) 50 100 150 200

Plot the new supply schedule on the axes in Figure 7.2 and label it S1. Label the new equilibrium E1. Under these conditions, competitive market forces would tend to establish an equilibrium price of $0.30 per Greebe and an equilibrium quantity of 150 million Greebes. Compared with the equilibrium price in Question 1, we say that because of this change in (price / underlying conditions), the (supply / quantity supplied) changed; and both the equilibrium price and the equilibrium quantity changed. The equilibrium price (increased / decreased), and the equilibrium quantity (increased / decreased). 5. Now, with the supply schedule at S1, suppose further that a sharp drop in people’s incomes as the result of a prolonged recession causes the demand schedule to change to the following:

Figure 7.4

New Demand for Greebes Price ($ per Greebe) $.15 .20 .25 .30

Quantity Demanded (millions of Greebes) 200 150 100 50

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.

359

UNIT

1 Macroeconomics

LESSON 4 ■ ACTIVITY 7

Answer Key

Plot the new demand schedule on the axes in Figure 7.2 and label it D1. Label the new equilibrium E2. Under these conditions, with the supply schedule at S1, competitive market forces would tend to per Greebe and an equilibrium quantity of establish an equilibrium price of $0.25 million Greebes. Compared with the equilibrium price in Question 4, because of this 100 change in (price / underlying conditions), the (demand / quantity demanded) changed. The equilibrium price (increased / decreased), and the equilibrium quantity (increased / decreased). 6. The movement from the first equilibrium price and quantity to the new equilibrium price and quantity is the result of a (price / nonprice) effect.

Part B The following questions refer to a group of related markets in the United States during a given time period. Assume that the markets are perfectly competitive and that the supply and demand model is completely applicable. The figures show the supply and demand in each market before the assumed change occurs. Trace through the effects of the assumed change, other things constant. Work your way from left to right. Shift only one curve in each market. For each market, draw whatever new supply or demand curves are needed, labeling each new curve S1 or D1. Then circle the correct symbol under each diagram (↑ for increase, — for unchanged, and ↓ for decrease). Remember to shift only one curve in each market. 7. Assume that a new fertilizer dramatically increases the amount of wheat that can be harvested with no additional labor or machinery. Also assume that this fertilizer does not affect potato farming and that people are satisfied to eat either bread made from wheat flour or potatoes.

Figure 7.5

D

S

S1

D

S

D1

PRICE

S1

PRICE

S

PRICE

PRICE

Effects of a New Fertilizer

D

S D1 D

QUANTITY

QUANTITY

QUANTITY

QUANTITY

Wheat

Bread

Potatoes

Wheat Harvesting Machinery

Demand:

Supply:

Equilibrium price: Equilibrium quantity:

360

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.

UNIT

1 Macroeconomics

Answer Key

LESSON 4 ■ ACTIVITY 7

8. Assume that a heavy frost destroys half the world’s coffee crop and that people use more cream in coffee than they do in tea.

Figure 7.6

Effects of a Loss of Coffee Crop

D1 D

D

S

PRICE

S

PRICE

PRICE

S

PRICE

S1 S

D1 D

D1 D

QUANTITY

QUANTITY

QUANTITY

QUANTITY

Coffee

Tea

Cream

Automatic Coffee Makers

Demand:

Supply:

Equilibrium price: Equilibrium quantity:

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.

361

UNIT

1 Macroeconomics

LESSON 4 ■ ACTIVITY 7

Answer Key

9. Assume beef and pork are perfect substitutes. The price of pork rises dramatically. Catsup is a complement to beef; mustard is a complement to pork.

Figure 7.7

D1 D

PRICE

PRICE

D1 D

PRICE

S

S

S D1 D

PRICE

Effects of a Change in the Price of Pork S

D1 D

QUANTITY

QUANTITY

QUANTITY

QUANTITY

Beef

Feed for Cattle

Catsup

Mustard

Demand:

Supply:

Equilibrium price: Equilibrium quantity:

362

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.